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11/15/2010 04:44:07 PM · #1 |
| Watch this while I go bandage my head and wipe the blood off the wall. |
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11/15/2010 05:04:00 PM · #2 |
| A great example of why I'm no longer voting... |
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11/15/2010 05:18:53 PM · #3 |
| Well matched animation and analysis. Both bite. |
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11/15/2010 05:38:46 PM · #4 |
Originally posted by BrennanOB:
Well matched animation and analysis. Both bite. |
Know your audience. ;-) |
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11/15/2010 05:53:48 PM · #5 |
| I'm dying to hear the Brennan or Scalvert analysis of quantitative easing. No animation necessary. Tell us how it is going to help our economy. Be sure to make it good enough to appease the Chinese. |
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11/15/2010 07:44:03 PM · #6 |
The assertion that the Fed has never done anything right, and that there is no reason action ought to be taken to prevent a deflationary spiral, are so simpleminded that they defy argument.
MIT has a quick definition that skips the simplistic partisan slant. I'm not sure it is the right policy, but the video makes it look like only idiots think its a good idea, and that is simply not the case. In a period of massive capital contraction of private paper, the Fed has to cover the gap to avoid drastic results, that is their job, to act as a shock absorber for the greater economy.
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11/15/2010 07:44:57 PM · #7 |
It isn't as complicated as it sounds.
Economies usually control inflation/deflation through interest base rates. Several countries (inc. US and UK) have hit the bottom of base rates and need more tools to manage inflation/deflation.
QE is the invention of money in order to buy back government bonds from banks with the intention of improving their cash reserves and enabling more lending. The loss of value to the economy from inventing money is offset by the benefits of freeing up money (which was prevoiusly lent to the government) for lending to business. Without lending, businesses cannot leverage themselves and taxable profits will suffer. By enabling lending, a virtuous and profitable circle is enabled that should be taxable so as to make QE cost neutral.
Contrary to what the video suggests, the alternative risk of deflation is usually disastrous. In a deflationary situation, things get cheaper (not more expensive) over time. Think about how your spending habits would change if things were getting cheaper over time - you would delay all spending as much as possible. Cash would get tied up and there would be even less liquidity and lending - creating a race for the bottom.
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11/15/2010 08:06:32 PM · #8 |
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11/15/2010 09:07:22 PM · #9 |
Nice circular explanation presented there. ;o)
Message edited by author 2010-11-15 21:07:42.
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11/15/2010 09:33:06 PM · #10 |
Originally posted by Matthew:
Contrary to what the video suggests, the alternative risk of deflation is usually disastrous. In a deflationary situation, things get cheaper (not more expensive) over time. Think about how your spending habits would change if things were getting cheaper over time - you would delay all spending as much as possible. Cash would get tied up and there would be even less liquidity and lending - creating a race for the bottom. |
Well said, Matthew (and Brennan). While deflation makes products cheaper to buy, there are some major downsides that were ignored in that oversimplified video. When prices go down, people tend to delay purchases even if they can afford them in anticipation of better deals ahead... the opposite of stimulating the economy. Reduced demand and lower prices lead to lower profit margins while wages stay at the same levels and create a cost strain on employers... the opposite of tackling unemployment. Banks become more hesitant to lend because the future purchasing power of that money becomes more attractive if they sit on it than the interest they'd make on loans (the value of collateral also declines), so businesses have a tougher time with financing... the opposite of addressing a credit crunch. Existing loans effectively become a higher interest rate as the purchasing power is increased on the money you owe while the asset value falls... the opposite of solving the foreclosure crisis. While the wisdom of increasing money supply versus alternative approaches may be open to debate, you might notice that the effects of deflation happen to be THE marquee problems of the current economy. They were also key factors in the Great Depression— an event studied extensively by a certain Princeton economics professor by the name of Ben Bernanke, later appointed Fed Chairman by Bush. Hence one of his first speeches as a Federal Reserve Governor: "Deflation: Making Sure It Doesn't Happen Here." |
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11/15/2010 11:07:06 PM · #11 |
I'd just raise two points. First, quantitative easing, as I think Matthew said, is an evermore radical solution to a problem we have previously controlled by lowering interest rates. The fact that we are out of interest rate "bullets" and are still facing a crisis reveals that our deficit spending is unsustainable and more and more radical solutions will be required to keep things under the appearance of stability.
Second, while deflation has been the fear, we have not seen any. And while inflation has not seemed to be present, we can see it rearing its head in commodities (when priced in US dollars) like oil which will assuredly make its way through the system.
The day congress passed the stimulus bill in Oct, 2008 I bought gold for $780/oz. I have nearly doubled my money while the S&P is still 10% below its level at that time. I can promise you it was not deflation that did this for me.
I'm not saying QE isn't our only option, but I suspect the medicine will eventually be worse than the disease. The knife's edge is far too thin for any of the jokers at the Fed or in congress to successfully walk.
Message edited by author 2010-11-15 23:09:16. |
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11/15/2010 11:53:26 PM · #12 |
Originally posted by scalvert:
Originally posted by Matthew:
Contrary to what the video suggests, the alternative risk of deflation is usually disastrous. In a deflationary situation, things get cheaper (not more expensive) over time. Think about how your spending habits would change if things were getting cheaper over time - you would delay all spending as much as possible. Cash would get tied up and there would be even less liquidity and lending - creating a race for the bottom. |
Well said, Matthew (and Brennan). While deflation makes products cheaper to buy, there are some major downsides that were ignored in that oversimplified video. When prices go down, people tend to delay purchases even if they can afford them in anticipation of better deals ahead... the opposite of stimulating the economy. Reduced demand and lower prices lead to lower profit margins while wages stay at the same levels and create a cost strain on employers... the opposite of tackling unemployment. Banks become more hesitant to lend because the future purchasing power of that money becomes more attractive if they sit on it than the interest they'd make on loans (the value of collateral also declines), so businesses have a tougher time with financing... the opposite of addressing a credit crunch. Existing loans effectively become a higher interest rate as the purchasing power is increased on the money you owe while the asset value falls... the opposite of solving the foreclosure crisis. While the wisdom of increasing money supply versus alternative approaches may be open to debate, you might notice that the effects of deflation happen to be THE marquee problems of the current economy. They were also key factors in the Great Depression— an event studied extensively by a certain Princeton economics professor by the name of Ben Bernanke, later appointed Fed Chairman by Bush. Hence one of his first speeches as a Federal Reserve Governor: "Deflation: Making Sure It Doesn't Happen Here." |
Uh, yeah, except we are not in a period of deflation. We are in a period of "declining inflation" according to the fed itself. And what you are referring to is actually a "deflationary spiral" which we are far from at this point. As Doc pointed out, real inflation is already on the horizon with commodity prices already up. And what about the side issue of purchasing treasury bonds through Goldman Sachs instead of directly through the Treasury Dept? And is this is the same Bernanke that swore the Fed would not monetize the debt just a year ago?
All the money thrown at the problem of the economy has failed and the fact that so much money was thrown at it is causing it's own problems and the response is to throw more money at it? It is estimated that this printing of money could devalue the dollar by as much as 20% - this is essentially the same as a 20% tax - 20% less for me to pay bills with.
I don't pretend to know all the complexities of macro economics, but I do know that complexity itself is often used as a tool to manipulate people and markets to the advantage of certain special interests - even though it flies in the face of common sense. I also agree with Brennan that there are some that think the government can't do anything right - I am not one of them - but there are also people who believe the government can do no wrong, but ONLY when their chosen person or party is in charge. It happens on both sides and there are some people - probably most people - who simply want solutions with positive and lasting results.
So far, you, Brennan and Matthew are the only ones that seem to be in favor of this action by the fed (not counting the fed and Goldman Sachs) although I am sure you can point me to all the sources that all this printing money at this point in time is a good move for the economy. And to argue that "things would/will be much worse if we did not do it" is so simpleminded that it defies argument (to borrow a line from Brennan that was clearly intended to foster open discussion and debate).
For reference, some of the articles I've been reading or skimming through:
The World Says No to America's Monopoly Money
The Real Reason for QE2
A Significant Letter: Prominent economists write a letter to Ben Bernanke opposing QE2.
U.S. Quantitative Easing is Fracturing the Global Economy
The 9 Reasons Why Quantitative Easing Is Bad For The U.S. Economy
Message edited by author 2010-11-15 23:54:40. |
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11/15/2010 11:56:41 PM · #13 |
The object is to AVOID deflation, not react to it once it's too late.
The chief executive of the Boston Federal Reserve Bank, Eric Rosengren, assumed the possibility US economy faces deflation. He said we need to counter it "immediately and vigorously", not to go the way Japan did in 80s when the country within a decade faced deflation.
This fear is natural, because the 8 months of 2010 showed only 1,1% inflation rate and it went along with unemployment growth and decrease of economic activity index. The FRS chairman Ben Bernanke had already mentioned that the only way to reach 2% inflation is printing more dollars. |
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11/16/2010 12:22:19 AM · #14 |
Originally posted by scalvert:
The object is to AVOID deflation, not react to it once it's too late.
The chief executive of the Boston Federal Reserve Bank, Eric Rosengren, assumed the possibility US economy faces deflation. He said we need to counter it "immediately and vigorously", not to go the way Japan did in 80s when the country within a decade faced deflation.
This fear is natural, because the 8 months of 2010 showed only 1,1% inflation rate and it went along with unemployment growth and decrease of economic activity index. The FRS chairman Ben Bernanke had already mentioned that the only way to reach 2% inflation is printing more dollars. |
The problem is we are likely to avoid getting hit by the bus by jumping off a cliff.
As much as I like Obama and voted for him, it seems obvious that the Stimulus Plan and QE1 did not have the intended effect. And while everybody can argue about how much worse it may or may not have been (and that is purely an argument of opinion), nobody can argue that we are not in the place we thought we would be two years later (or at least the government thought we would be). But politicians these days are usually in for a dollar if they are in for a dime so we wind up with MORE of the same. Ta da. QE2.
The problem comes when we are faced with QE3 and QE4 and I pray it does not get there, because that will truly mean the endtimes are here for the US. We have already spent precious international capital with QE2 as everybody races their currency to the bottom. Soon China will simply have had enough and really start asserting its control. It's probably already inevitable, but the sway that China has over the rest of the world by the time even you or I die will be much larger than it is now. I'm not sure I like what that world looks like from a political/philosphical point of view. Of course any switch in power like that is going to risk some madman (or woman *cough*Palin*cough*) from thinking they can keep that from happening with a few nuclear codes. I know I may sound like a nut, but this is the way the world operates and parallel things have happened countless times in our history.
Anyway, let's just hope we get out of this mess we're in.
Message edited by author 2010-11-16 00:23:31. |
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11/16/2010 01:09:07 AM · #15 |
Originally posted by Art Roflmao:
So far, you, Brennan and Matthew are the only ones that seem to be in favor of this action by the fed (not counting the fed and Goldman Sachs) although I am sure you can point me to all the sources that all this printing money at this point in time is a good move for the economy. And to argue that "things would/will be much worse if we did not do it" is so simpleminded that it defies argument (to borrow a line from Brennan that was clearly intended to foster open discussion and debate).
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My macro economics is pretty rusty, but when complex monetary policy reduced to simple "isn't this obvious!" statements by cartoon characters, I tend to assume that someone is trying to bullshit me. Are there good arguments against another round of easing? Absolutely. But when someone is paying to make cute lil bunnies rip a federal bank policy, and when Fox News and Sarah Palin go on the warpath to attack ideas they clearly don't fully understand I have to wonder who's ox is being gored.
There have been those who have been wanting to get rid of the federal reserve bank since Hamilton thought of it, but guessing what is likely to be coming ahead and steering to make the best of it is their job. I assume they will be wrong sometimes, and hopefully more often will be right, but to compare their studied deliberations and the resultant policy with the cartooned attacks make me long for the days of Thomas Nast, when cartoons were complex as the ideas they tackled. |
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11/16/2010 01:30:11 AM · #16 |
Originally posted by DrAchoo:
it seems obvious that the Stimulus Plan and QE1 did not have the intended effect. |
How do you know? It took eight years to move the economy from a fiscal surplus to the brink of ruin, and you're not going to magically recover from that in one or two years— especially with the Republicans doing everything in their power to block progress. This is history repeating itself:
In 1930, the U.S. economy was shrinking and dramatic Fed rate cuts weren't enough to stem the problem. However, the Fed initially chose NOT to significantly increase the money supply. Treasury Secretary Andrew Mellon elected to stand by as the market worked itself out: "Liquidate labor, liquidate stocks, liquidate real estateâ€Â¦ values will be adjusted, and enterprising people will pick up the wreck from less-competent people." Turns out that wasn't such a hot idea. Within two years, the GNP and money supply both tanked about 30% and unemployment jumped from 3.2% to 23.6%. The Fed finally expanded the money supply near the end of 1932, Roosevelt launched banking and Wall St. reforms, took us off the gold standard, raised taxes on the wealthy and initiated major federal projects to put Americans to work. Sound familiar? The economic freefall slowed significantly, but it still took 3 or 4 years for the unemployment rate to moderate. Of course Big Business wasn't any happier about efforts to "redistribute the wealth" then as they are now.
The first nation to fully recover from the Great Depression was Sweden, which followed a policy of Keynesian deficit spending. Germany and Great Britain were 2nd and 3rd- on heavy deficit spending in preparation for war. In 1937, economists attributed the economic growth so far to heavy government spending, but Roosevelt was fearful of an unbalanced budget and cut spending. That summer, the nation sank into a year-long recession driving GNP down 4.5% and unemployment up 5.7%. WWII forced the government to borrow and spend to build up the military, resulting in a national debt 123% of GNP and a top tax rate of 94%. We continued to tax the rich at least 91% until 1963, yet that period covered the greatest economic boom in American history, and it stayed in the 70% range until 1980. Now the top tax bracket is at 35%... |
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11/16/2010 01:38:08 AM · #17 |
Originally posted by BrennanOB:
My macro economics is pretty rusty, but when complex monetary policy reduced to simple "isn't this obvious!" statements by cartoon characters, I tend to assume that someone is trying to bullshit me. Are there good arguments against another round of easing? Absolutely. But when someone is paying to make cute lil bunnies rip a federal bank policy, and when Fox News and Sarah Palin go on the warpath to attack ideas they clearly don't fully understand I have to wonder who's ox is being gored.
There have been those who have been wanting to get rid of the federal reserve bank since Hamilton thought of it, but guessing what is likely to be coming ahead and steering to make the best of it is their job. I assume they will be wrong sometimes, and hopefully more often will be right, but to compare their studied deliberations and the resultant policy with the cartooned attacks make me long for the days of Thomas Nast, when cartoons were complex as the ideas they tackled. |
^ What he said. None of us (including myself) are really qualified to judge the merits of various fiscal approaches, but we should at least know better than to accept a ridiculously simplistic cartoon at face value. A macroeconomist that earns the trust of two presidents from opposing parties probably knows a bit more about the long term impact of these policies than any of us ever will. |
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11/16/2010 05:13:37 AM · #18 |
Originally posted by DrAchoo:
Soon China will simply have had enough and really start asserting its control. It's probably already inevitable, but the sway that China has over the rest of the world by the time even you or I die will be much larger than it is now. |
Location, location and how the West was won
"On his current visit to Beijing, UK Prime Minister David Cameron has said China will soon reclaim its position as the world's biggest economy - a role it has held for 18 of the past 20 centuries. But how did the US, Britain and the rest of Europe interrupt this reign of supremacy? It comes down to location."
.....
"When power and wealth shifted across the Atlantic from Europe to America in the mid-20th Century, the process was horrifyingly violent. As we move into the mid-21st century, power and wealth will shift across the Pacific from America to China."
"The great challenge for the next generation is not how to stop geography from working; it is how to manage its effects without a Third World War." |
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11/16/2010 10:51:49 AM · #19 |
Originally posted by scalvert:
Originally posted by DrAchoo:
it seems obvious that the Stimulus Plan and QE1 did not have the intended effect. |
How do you know? |
I don't. I was using the government's own predictions about the unemployment rate two years ago. They did not anticipate that we would still be hovering near 10% at this time and projected a much more robust economy. Arguing whether things would have been worse or not is futile. Maybe they would, maybe they wouldn't. I was just pointing out that the weapons of stimulus spending and QE1 were not as powerful as the government predicted.
QE1 probably failed because the money fell into the black hole of the big bank's reserves. The money was supposed to increase the banks' willingness to lend, but instead we saw the banks more or less sit on it. Stimulus was meant to spend when the consumer could not, but many states used the money to shore up existing budgets rather than spend even more.
Anyway, I will never claim to be an expert on this stuff. Pure armchair dude here. But I question the steadfast faith in Keynsian economics I sometimes run across and would put it squarely in the same camp as those who believe all we need to do is drastically cut taxes for big business and the wealthy and let it all trickle down to the rest of us.
EDIT to add that JH has some good quotes and I really think the last one is a very important warning. When huge numbers of people forsee a bleak future, wars happen.
Message edited by author 2010-11-16 10:53:41. |
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11/16/2010 11:09:22 AM · #20 |
| Because I like to link sources, here's the government's own white paper from January 2009 predicting the unemployment rate, with stimulus, would stay at about 7%. See the chart on page 4. |
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11/16/2010 11:32:08 AM · #21 |
Originally posted by scalvert:
a top tax rate of 94%. We continued to tax the rich at least 91% until 1963, yet that period covered the greatest economic boom in American history, and it stayed in the 70% range until 1980. Now the top tax bracket is at 35%... |
If the top rates were the only variable in the equation of total taxes paid by an entity. But tax rates are only a small portion of the answer. Even with these enormous rates there were plenty of times that a rich cat making millions of bux would pay about the same TOTAL tax as a middle income person making several tens of thousands of dollars. Obviously tax rates are just another way to blow smoke up the average persons ass. |
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11/16/2010 11:35:11 AM · #22 |
Originally posted by scalvert:
A macroeconomist that earns the trust of two presidents from opposing parties probably knows a bit more about the long term impact of these policies than any of us ever will. |
That statement is so God Damn funny I think we should have it as a Challenge.
Trust, that's funny. Thanks Scally boy. You've provided my daily belly laugh.
Quit hogging the cool aide. |
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11/16/2010 11:43:33 AM · #23 |
Originally posted by DrAchoo:
I was using the government's own predictions about the unemployment rate two years ago. They did not anticipate that we would still be hovering near 10% at this time and projected a much more robust economy. |
They did not anticipate a fierce minority effort to sabotage any attempt to solve the crisis, either. You can't continue tax breaks for the wealthiest Americans AND control the deficit, nor can you stimulate the economy AND reduce spending, so it will be very interesting to see where Republicans go from here. |
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11/16/2010 11:45:21 AM · #24 |
Originally posted by FireBird:
Obviously tax rates are just another way to blow smoke up the average persons ass. |
Originally posted by BrennanOB:
My macro economics is pretty rusty, but when complex monetary policy reduced to simple "isn't this obvious!" statements by cartoon characters, I tend to assume that someone is trying to bullshit me. |
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11/16/2010 11:57:46 AM · #25 |
Originally posted by FireBird:
Originally posted by scalvert:
A macroeconomist that earns the trust of two presidents from opposing parties probably knows a bit more about the long term impact of these policies than any of us ever will. |
That statement is so God Damn funny I think we should have it as a Challenge.
Trust, that's funny. Thanks Scally boy. You've provided my daily belly laugh.
Quit hogging the cool aide. |
I have never understood how intelligence and qualifications have come to be so reviled as they appear to be within large parts of the US voting public.
I can only infer from some small details what the reasons might be, like an apparently unquestioning over-reliance on spell checker software.
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